Massachusetts Computer Services Tax Riles IT Industry

Massachusetts' legislature has proposed imposing a 6.25% sales tax on computer and software services. Opponents of the bill say the new tax would negatively affect the state's technology industry, create a drag on innovation and hurt other industries and businesses that use these services.

The tax is part of a transportation bill meant to address the Massachusetts Bay Transportation Authority's budget deficit. The bill was adopted by the House of Representatives on July 17 and by the Senate on July 18. It initially passed in June, but Massachusetts Governor Deval Patrick returned it to lawmakers in a dispute over toll revenue. If enacted, the legislation would enforce a 6.25% sales tax on certain computer and software services in the state.

The stakes could be significant. Massachusetts is the sixth-largest tech employer in the U.S., and 9% of the state's private sector talent works at tech firms, according to industry trade group TechAmerica.

The tech industry, however, had been slow to challenge the proposed tax, according to Senator Stephen Brewer, who chairs the Senate Committee on Ways and Means. "We heard precious little from industry," he told the Boston Globe.

That's changed in recent days as opponents have challenged the bill, arguing that it would put the state at a competitive disadvantage.

TechAmerica issued a letter to members of the Massachusetts General Court asking to "fix the computer system design services tax so that Massachusetts can maintain -- if not strengthen -- its place as a leading high-tech state."

"While we understand the need to fund critical transportation infrastructure projects, there must be careful consideration of the impact that new taxes pose on businesses. [The tax] does not strike that balance and punishes businesses -- particularly the technology sector," Kevin Callahan, TechAmerica's director of state government affairs for Massachusetts, said in the letter. "The purpose of the tax is to increase state revenue; however, driving business out of Massachusetts would ultimately have the opposite result."

Callahan also contended that the effects would be felt not only by the IT sector, but many other industries as well, including retailers, restaurants, banks and healthcare providers. Consumers, too, would "bear the weight of this new tax," said Callahan.

Another group, the Massachusetts Taxpayers Foundation, said the tax on computer services could cost the state's employers an additional $500 million annually. "The tax takes clear aim at the state's innovation economy, which is the essence of the state's competitive edge and at the core of its economic future. Many of the key investments in computers and software that help to incubate groundbreaking discoveries and cutting-edge ideas will now be subject to the sales tax," the nonprofit research organization said in a statement reacting to the initial bill in June.

Only three other states have a sales tax on computer services -- New Mexico (5.1%), Hawaii (4%) and South Dakota (4%).

Tech in general is global, and IT services - meaning software development is an extremely competitive global market. Adding a local tax simply pushes work from local vendors to non-local ones. 6.25% is a big number, we win or lose contracts for less then 2% difference.

It worries me that I will have to charge 6.25% tax to any clients that i have in MA. but it worries me more, that any vendors that I use (1099 staff) will have to charge me 6.25%, and I will have to mark that up (2.5x) and pass it on, and then charge 6.25% on top of that.

The work to figure this out will wind up costing way more then the 6.25%, and i don't yet know what I can pass on and what I can absorb. I do know that National, and global companies that do business is MA, will assume that they might be on the hook regardless of where the work is preformed, and simply choose to pick a different vendor.

majenkins: You're right innovation doesn't just stop. But it does pack up and move elsewhere.

Back in the 70's and 80's, Connecticut had a booming high-tech industry that was was not only able to offer competitive jobs to all engineering and technology graduates, but also entice those from other states. In fact, CT was called the "High-Tech Corridor" between Boston and NY. Then in the late 80's they passed new legislation to control growth in high-tech with new taxation. What followed is a collapse of the high-tech industry as companies relocated to other states. To this date, CT has not recovered. It's a nice state, as long as your profession is NOT in high tech or in any way related to high tech.

Since engineering talent is a scarce resource, and at the top of the food chain, it is fragile and can affect so many others if critical mass cannot be maintained. A bill, just like the one proposed, can trigger major investors to move their R&D and IT centers to other states, and if R&D leaves, others follow. What executive would be against saving their company an additional 6.25% on R&D and IT costs? Doing business in MA already carries a high cost of living as well as high income, property, sales, and corporate taxes. Adding an additional burden could be the tipping point. I believe it is a too high a price to pay for covering the transportation defect.

It would be nice if this article would have shed some light on what exactly is going to be subject to a sales tax and what still isn't taxable in that state before and after the new law. Here in Ohio, I've always had to charge my clients the state sales tax on certain types of computer work, but not for all types of work, so perhaps Massachusetts is just catching up to Ohio. I'm also wondering what to think about the last line in this article that fails to include Ohio, since I charge sales tax for some computer work! Sadly, the article fails to clarify any important facts regarding the proposed tax, such as whether it's just normal repair, hardware, and software sales that are taxable or otherwise, and it makes me think there's more to this story than the author bothered to investigate and include in the article - just copying the A.P. wire newsfeed, are we?

Every time someone says they plan to do something in the tech industry that someone else doesn't like one of first, if not the very first, things the people that don't like it say is it will slow/hurt innovation. Well if innovation were really that fragile then it would have been completely killed by now. I am not saying this tax is a good thing or a bad thing, heck everybody wants more money, but please stop with the clich+¨d G«£this will slow/hurt innovationG«• nonsense. Just find another dead horse to beat for a while, canG«÷t you.

Cost, time, and risk. It's the demand trifecta vying for the attention of both technology professionals and attorneys charged with balancing the expectations of their clients and business units with the hard reality of the current financial and regulatory climate. Sometimes, organizations assume high levels of risk as a result of their inability to meet the costs involved in data protection. In other instances, it's time that's of the essence, as with a data breach.

As InformationWeek Government readers were busy firming up their fiscal year 2015 budgets, we asked them to rate more than 30 IT initiatives in terms of importance and current leadership focus. No surprise, among more than 30 options, security is No. 1. After that, things get less predictable.